Conditions remain tough for district farmers; cropland values slide

First-Quarter 2015 Agricultural Credit Conditions Survey

Farmers continue to struggle with low crop prices and tight margins, which has put further downward pressure on land prices heading into planting season, according to results of the Minneapolis Fed’s first-quarter (April) agricultural credit conditions survey. Farm incomes and capital spending decreased, according to lenders responding to the survey. Tighter cash flows slightly reduced the rate of loan repayments, while renewals and extensions increased slightly, as did loan demand. Meanwhile, cropland values and rents decreased slightly in most areas. The outlook for the second quarter of 2015 was downbeat, with survey respondents predicting further decreases in incomes, capital expenditures and household spending.

Farm income, household spending and capital investment

“2015 cash flows are tighter for the crop farmer,” reported a North Dakota lender, who added, “I expect grains growers to greatly reduce capital purchases.” These comments were reflected in the survey results, as 79 percent of district lenders surveyed reported that farm incomes decreased in the first quarter of 2015 from the previous quarter (see chart). Three of four respondents said capital spending was down. In contrast to recent quarters when household spending within the district remained flat, a third of lenders reported it fell, with 58 percent reporting no change.

Montana experienced the most widespread increase in income in the district, likely due to strength in ranching relative to crop farming. A third of Montana respondents reported higher farm income (with the balance reporting flat income), with similar results for household spending, while increases in capital spending were reported by half of respondents there. Lenders in Minnesota were the most negative, as 96 percent of those surveyed in the state reported falling incomes in the quarter. Minnesota respondents also reported household and capital spending decreases most frequently in the district.

Loan repayments and renewals

As might be expected in a time of falling incomes, the rate of repayment on agricultural loans dropped slightly, while renewals slightly increased. Loan repayments were unchanged for 56 percent of respondents, while 32 percent reported that repayment rates decreased. A higher percentage of lenders stated that the renewal activity held steady, at 62 percent, but 33 percent reported a greater number of renewals. Minnesota saw the lowest rate of repayment, with half of lenders reporting it decreased.

Demand for loans, required collateral and interest rates

Demand for loans rose slightly from the last survey, driven by falling incomes. Nearly half of lenders surveyed, 45 percent, reported increased loan demand, while an equal share experienced no change. The amount of required collateral increased slightly on balance, but 85 percent of respondents reported no change. Interest rates fell slightly overall, with variable rates on operating, machinery and real estate loans on average all slightly below their levels in the previous quarter; fixed rates on operating and machinery loans also decreased, while holding steady for real estate.

Cash rents and land values

With lower crop prices and incomes lingering for the last few years, the period of very strong growth in land prices has receded further into the past. The average value for nonirrigated cropland in the district fell by almost 4 percent from the first quarter of 2014; irrigated land increased slightly (less than 1 percent), while ranchland values increased 8 percent, likely owing to solid livestock prices. The district average cash rent for nonirrigated land decreased more than the land value, tumbling by more than 6 percent from a year ago. Rents for irrigated land dropped nearly 8 percent, while ranchland rents rose by 3 percent.

Land values fell the most in Minnesota, where nonirrigated cropland prices dropped 6 percent compared with a year earlier, according to survey respondents. Irrigated Minnesota cropland prices barely changed, and ranchland values rose 1 percent, while rents there fell by double digits for all three classes of land. Cropland prices generally declined in other states with the exception of Montana, where nonirrrigated land prices increased nearly 5 percent from a year earlier. In contrast, ranchland prices decreased in Montana but rose in every other state.

Outlook

Expectations heading into the growing season were slightly pessimistic, generally. Across the district, 78 percent of lenders predicted that farm income will decrease in the second quarter of 2015, compared with 4 percent forecasting increases. The outlook for capital spending is similar, with 74 percent expecting decreases, while 46 percentexpect farm household spending to fall. Loan demand was generally forecast to rise in the upcoming quarter (46 percent expect increases), but the outlook for repayment rates was lower, while respondents expect renewals and collateral requirements to increase slightly on average.

The weak outlook is largely driven by expectations for crop prices. As one Minnesota lender put it, “Negative cash flows and declining working capital will become larger issues by the end of 2015 if commodity prices do not improve.”